The Bank of England Governor was drawn into the scandal that has engulfed Britain’s banks yesterday as documents suggested US authorities warned him about potential rate-fixing more than four years ago.

Sir Mervyn King was sent a private email by Timothy Geithner, now the US Treasury Secretary, warning of irregularities in the Libor rate.

In June 2008, Mr Geithner called for measures to ‘eliminate [the] incentive to misreport’ the rate, which measures how much banks operating in London are paying to borrow from each other.

Call for changes: US Treasury Secretary
Timothy Geithner, left, warned Bank of England governor Mervyn King in
June 2008 about the dangers of 'deliberate misreporting' of Libor
submissions

The email from Timothy Geithner, then head of the New York Federal Reserve Bank, to Sir Mervyn King in which suggestion to reform Libor were attached

In a report entitled ‘Recommendations
for Enhancing the Credibility of Libor’, he wrote to Sir Mervyn
proposing a raft of reforms designed to prevent ‘accidental or
deliberate misreporting’.

Barclays has been fined £290million
for fiddling Libor – a key interest rate set in London, which affects
the price of trillions of pounds worth of mortgages, loans and other
financial products around the world – and at least a dozen more banks
are implicated.

Banks are accused of manipulating the
rate before the financial crisis to boost traders’ profits, and then to
suggest they were stronger than they were in reality during the crisis.

The scandal has already claimed the scalps of bank boss Bob Diamond and two other senior Barclays executives.

MPs said the latest revelations left
Sir Mervyn facing ‘serious questions’ as he prepares to give evidence to
Parliament on Tuesday. Last week, Sir Mervyn’s deputy Paul Tucker
insisted the Bank had known nothing of suggestions the rate was being
deliberately fiddled, telling MPs: ‘No, we were not aware of allegations
of dishonesty.’

There is no evidence that the Bank
condoned or encouraged fiddling of the rate. Indeed, official reports by
the Financial Services Authority and the US Department of Justice have
cleared Bank officials of leaning on Barclays.

Pictured leaving a Treasury Select Committee hearing where he gave evidence earlier this month, former Barclays chief executive Bob Diamond has since resigned from the top post

But there is increasing evidence that
concerns about the reliability of Libor were widely understood and
shared years ago. Tory MP David Ruffley, a member of the Treasury select
committee, said: ‘Sir Mervyn King now has serious questions to answer
about what the top of the Bank of England knew and when it knew it.

‘This email appears to show that the
US authorities were warning the Bank before the financial crisis
unfolded that there was an incentive to deliberately misrepresent this
rate – or as most people would call it, fiddle it. Paul Tucker told us
no alarm bells were ringing. It now appears the US was ringing alarm
bells loud and clear in mid-2008.’

Mr Geithner, then head of the New York
Federal Reserve Bank, sent a memo to Sir Mervyn calling for a ‘more
credible reporting structure’ and broadening of the number of banks that
were included in the measurement of Libor.

His memo outlined a six-point plan to
overhaul the Libor process and strengthen governance. Last night the
Bank of England insisted no evidence of wrongdoing had been brought to
its attention.

‘Concerns about difficulties in
setting Libor in the stressed market conditions of late 2007 and 2008
were widely expressed, including in the media, although no evidence of
deliberate wrongdoing had been cited,’ a spokesman said.

Barclays last month paid $456 (£295m) in fines after admitting fiddling interest rate submission. More banks could be hit with similar punishments

The Bank said the British Bankers’
Association had launched a review of the process in June 2008 and
assured the Bank it would ‘take on board the recommendations’ from Mr
Geithner.

The Bank published its own
correspondence, showing that Sir Mervyn told Mr Geithner his proposals
were ‘sensible’ and passed them on to the BBA.

In an email to deputy governor Mr
Tucker on June 3, 2008, the chief executive of the BBA, Angela Knight,
wrote that ‘changes are being made to incorporate the views of the Fed’

WHAT IS LIBOR?

Libor, short for London Interbank Offered Rate, is the average interest rate at which banks lend to each other.

It is calculated from daily submissions by 16 leading global banks. Each bank sends details of the rate it pays to borrow money from other banks.

The rate is an indicator of the financial health of a company. Just as countries such as Greece and Portugal can expect to pay more to borrow when their finances are in a poor state, a bank in a perilous position will have to pay a higher interest rate to persuade other financial firms to take the risk of lending to it.

The Libor rate relies on banks being
honest about the rate at which they borrow. This is now emerging as one
of the reasons why it has been open to abuse.

The rate reflects an estimated $550 trillion worth of loans and derivatives.

It also has an impact on the rates of consumer borrowing, such as mortgages, student loans and credit cards.

Libor rate submissions could therefor increase the interest rates at which the public borrow, potentially leading to higher profits for banks.

At least 11 more institutions are
likely to be punished for fiddling their Libor submissions and face
hefty penalties like Barclays, say Morgan Stanley.

Barclays paid £295million last month
after admitting submitting false figures for the rate it was paying to
borrow from other banks. CEO Bob Diamond resigned over the scandal and
lost bonuses worth almost £20m.

Meanwhile, Chancellor George Osborne today said the launch of an £80 billion emergency scheme to kick start bank lending showed Britain was 'not powerless to act' in the face of the eurozone crisis.

The Bank of England and Treasury unveiled their 'funding for lending' programme in an attempt to ward off a tightening credit squeeze and help drag Britain out of its double dip recession.

The Bank painted a grim picture for households and businesses today as it warned that credit availability was falling and borrowing costs rising as the eurozone woes take their toll on the banking sector.

But the funding for lending scheme aims to free up the log jam in credit hitting the economy, by offering banks cheap finance on the condition they pass it on to borrowers.

Mr Osborne said: 'Today’s announcement aims to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their home.

He added the initiative would 'inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy - showing that we are not powerless to act in the face of the eurozone debt storm'.

More
than a dozen banks are currently under investigation by authorities in Europe,
Japan and the United States over suspected rigging of the global
borrowing cost benchmark, which is used in contracts worth trillions of
dollars globally.

Barclays
has bore the brunt of the fallout from the scandal but Morgan Stanley
estimates the other firms being investigated may also face hefty
regulatory and legal settlement costs through 2014.

The
British bank is the only one so far to admit changing its rate in order
to influence the pricing of derivatives and also to rebut speculation
about the weakness of its balance sheet during the financial crisis.
Libor is used for $550 trillion of interest rate derivatives contracts,
and influences rates for products including mortgages, student loans and
credit cards.

CRISIS DEEPENS

The crisis in the global economy deepened yesterday as the malaise spread to the US and China.

Italy was rocked by a downgrade to its credit rating – to only two levels above ‘junk’ – amid fears it will be the next country in the eurozone to need international aid.

Growth in China slowed for a sixth successive quarter to its weakest pace in more than three years and a survey in the US showed confidence slipping among households to the lowest level for seven months.

The
scandal so far has been mostly confined to London, with public outcry
that regulation in Britain was lax. But concern has grown about the
wider impact on consumers and the involvement of U.S. regulators.

The
latest analysis - the first comprehensive study into the effects of the
scandal - even excludes the fallout from U.S. and EU probes which could
add billions more in costs and fines.

EU
competition commissioner Joaquin Almunia will today say that an ongoing
investigation into interest rate derivatives linked to Libor and two
similar rates - Tribor and Euribor - is a 'priority'.

Taking into account the damping effect
that rate-rigging accusations may have on market share and activity,
Morgan Stanley estimates that earnings and book value will be reduced
even further.

The scandal is expected to deter retail investors, hedge funds and pension funds from investing in banks.

Barclays
is already feeling the effects of the scandal as it lost its first
major deal yesterday as the state-backed Japan Bank for International
Cooperation pulled out of a bond issue worth $1bn.

Fears
of a mini-exodus were compounded further when Leicestershire county
council cited the Libor scandal for its withdrawal of £6m it had
deposited with the bank.

The analysts estimated
that regulatory fines and litigation settlements would reduce book value
per share by a median of 0.5 percent in 2012 for those banks as well as
Barclays PLC , which announced a $453 million settlement with UK and
U.S. regulators last month.

While the analysts, led by Betsy
Graseck, acknowledged that the estimates were 'crude,' their attempt at
quantifying the Libor-related damage to the banking industry was the
most specific yet.

The Libor, short for London Interbank
Offered Rate, is a key interest rate that underlies an estimated $550
trillion worth of loans and derivatives. A group of 16 global banks sets
the rate by giving daily estimates of how much it would cost them to
borrow funds from other banks at varying durations.

Morgan
Stanley's estimates were given in a best-to-worst case scenario for
each bank and based on the Barclays agreement, as well as the individual
banks' exposures to Libor-pegged assets.

'We know we're not posting an honest Libor rate'

One told an official at the New York Federal Reserve: ‘We know that we’re not posting an honest Libor’.

But though the Bank of England was also alerted to the US concerns, there was no equivalent UK probe.

The documents were released last night after a request from Republican Congressman Randy Neugebauer for information on conversations between the Fed and Barclays.

A few weeks after the call, the then head of the New York Fed, Timothy Geithner, alerted Bank of England governor Sir Mervyn King to his concerns about Libor.

Here is an edited version of the key section of the transcript of a call on April 11, 2008, between Fabiola Ravazzolo of the New York Fed and an unnamed Barclays trader:

TRADER: Now, um, you know, obviously there has been a lot of speculation about Libors and, you know...

FR: Mm hmm.

TRADER: I’ve read some really interesting articles about them... Um, and uh, you know we, w-we, we strongly feel it’s true to say that Dollar Libors do not reflect where the market is trading which is, you know, the same as a lot of other people have said.

FR: And, and why do you think that there is this, this discrepancy? Is it because banks maybe they are not reporting what they should or is it um...

TRADER: Well, let’s, let’s put it like this and I’m gonna be really frank and honest with you.

FR: No that’s why I am asking you

TRADER: You know we went through a period where we were putting in where we really thought we would be able to borrow cash in the interbank market and it was above where everyone else was publishing rates. And the next thing we knew, there was an article in the FT, charting our Libor contributions and comparing it with other banks and inferring we had a problem raising cash in the interbank market.

FR: Yeah.

TRADER: And our share price went down.

FR: Yes.

TRADER: So it’s never supposed to be the prerogative of a money market dealer to affect their company share value.

FR: Okay.

TRADER: And so we just fit in with the rest of the crowd, if you like.

FR: Okay.

TRADER: So, we know that we’re not posting um, an honest Libor.

FR: Okay.

TRADER: And yet and yet we are doing it, because, um, if we didn’t do it... it draws, um, unwanted attention on ourselves... not a useful thing for us as an organisation.

Parliamentary inquiry branded a 'whitewash'

The Parliamentary inquiry into the rate-fixing scandal was branded a ‘whitewash’ before it even began yesterday.

Several MPs on the Treasury select committee, which had already started investigating the affair, were left off the new committee despite being hailed as the most combative and effective questioners.

Labour’s John Mann said he and Tory Andrea Leadsom had been excluded because they were ‘too outspoken’. Mrs Leadsom, a former Barclays employee, won plaudits for her forensic questioning of former boss Bob Diamond last week.

But she caused controversy by saying politicians had been ‘pretty useless’ in uncovering the truth behind the Libor scandal.

The MP also caused uproar at the Treasury by backing Labour calls for George Osborne to apologise to Ed Balls for saying he had questions to answer over his role.

Sources said membership of the Parliamentary probe had been largely the preserve of its chairman, Tory MP Andrew Tyrie.

But the leaderships of the two main parties agreed the line-up. Unusually, the panel will be given the resources to use a senior QC to advise on and even question witnesses.

The MPs who have been selected are Tory Mark Garnier, Labour MPs Pat McFadden and Andy Love and Lib Dem John Thurso – all members of the Treasury committee.

The exclusion of Tories David Ruffley and Jesse Norman, two other members of the committee, also caused surprise.

Mr Mann, who offered to tattoo Barclays’ founding principles of ‘honesty, integrity and plain dealing’ on Mr Diamond’s knuckles to ensure he never forgot them, said: ‘Both Andrea and I were available for the inquiry and because we are too outspoken we have been blocked.

'This exposes the inquiry as a total whitewash, with Andrew Tyrie reaching his conclusions in advance of the meetings.’

PARLIAMENT'S PROBE INTO BANKS BRANDED A 'TOTAL JOKE' AS TOUGHEST INTERROGATORS ARE EXCLUDED

The parliamentary inquiry into the banking industry and Libor scandal was branded a 'total joke' today after two of the Commons’ toughest inquisitors on financial issues were excluded from it.

Neither Labour MP John Mann nor Conservative MP Andrea Leadsom have been selected to sit on the Parliamentary Commission on Banking Standards, despite their forthright questioning of bankers as members of the Treasury Select Committee.

The Commission will be chaired by Tory MP and Treasury Committee chairman Andrew Tyrie. Its other MP members will be Tory Mark Garnier, Labour MPs Andy Love and Pat McFadden and Liberal Democrat John Thurso - who all sit on the Treasury Committee too.

Tough questions: Labour MP John Mann branded the banking probe a 'total joke' after he and Conservative Andrea Leadsom were not chosen to take part

Mr Mann took to Twitter this morning to describe the new committee as 'a total joke'.

He said the inquiry would be a 'whitewash' and that he was going to set up his own.

'Both Andrea and I were available for the inquiry and because we are too outspoken we have been blocked,' he said.

'This exposes the inquiry as a total whitewash with Andrew Tyrie reaching his conclusions in advance of the meetings.

'We need to get to the bottom of this scandal and I’m therefore setting up my own inquiry into this dreadful mess.'

The Commission, which will study professional standards and the culture of the banking sector and recommend new legislation in the wake of the Libor rate-fixing scandal, will also feature members of the House of Lords.

A motion to set up the committee has been signed by Prime Minster David Cameron and Chancellor George Osborne as well as Labour leader Ed Miliband and shadow chancellor Ed Balls.Ms Leadsom won widespread praise for her forensic questioning of Barclays chief executive Bob Diamond earlier this month.

Mr Mann also gave the banker a tough time over the Libor scandal, telling him: 'Either you were complicit in what was going on, or you were grossly negligent, or you were grossly incompetent.'

Downing Street stressed that the three main parties had agreed who would be on the committee.

'The membership of the committee is something for the political parties and they have agreed between themselves who can serve,' the Prime Minister’s spokesman said.

'It is an unusual committee in that it can draw on advice and that includes using counsel to question witnesses.'